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Insights from the President of ProAg

07Aug

Random Q & A From Current Events

by Mike Connealy on 08.07.2012

Q. MC, what are your thoughts and guess on ultimate 2012 Farm Bill outcome with this dysfunctional Congress ?

A. The Republican House of Representatives leadership is lacking effectiveness… The House Ag Committee (HAC) did an excellent job of producing – on time – a 2012 Farm Bill for consideration. Last week, Speaker Boehner and Majority Leader Cantor punted and went on five week “recess” instead of scheduling floor time for the HAC bill. This was apparently due to the fact that they could not get enough votes from the Republican side to advance the bill. Many farm state Democrats were lined up to support the bill. One must conclude that Boehner and Cantor could not or would not convince their members to vote for passage. This was a slap to HAC Chairman Lucas and the many farm state Republicans affected.

Since we lack leadership on the majority side and we lack time to do much of anything before the September 30 expiration, my guess is that nothing happens and we venture into “limbo” beginning October 1st. The crop insurance program is unaffected for now and we move forward with fall business as normal. Perhaps after Election Day, the lame duck Congress might get something done, again one has to doubt anything that might require a compromise between the Democrats and Republicans.

Sequestration – the fiscal cliff – has an approaching 12-31-2012 drop dead date, perhaps a version of the 2012 Farm Bill gets wrapped up in that package. Again, this is not the preferred outcome because this could mean that farm state members have limited input. In any case, my guess is we head to “limbo” for an unknown length of time and we just have to “deal with it” the same as our farm producers and lenders have to “deal with it”.

Q. What impact does the 2012 drought have on the Approved Insurance Providers (AIP’s) ability to pay agent profit share for 2011 and/or 2012 ?

A. The 2012 drought has zero impact on 2011 profit share. The calculation for 2011 is based purely on the 2011 results. ProAg earned a 15% underwriting (UW) gain on our net retained (after cessions to FCIC for assigned risk and quota share) business in 2011 and therefore we are set to pay the profit share to those agents that earned one in early to mid October of 2012.

The 2012 crop year also stands on its own for results. Therefore the drought losses incurred or expected to develop in Illinois, Indiana, Ohio, Missouri, Kentucky, Iowa, etc. will impact an AIP ability to pay a 2012 profit share in any state, not just the drought affected states. The rule from RMA on this topic is that the AIP must have an overall underwriting gain for 2012 in order to pay an agent profit share. All the states for an AIP have an UW gain or UW loss and these are summed up to reach a total. If the losses in the drought states are severe enough, then there won’t be enough positives from the profitable states to cancel out the losses.

It is too early to determine the exact extent of the losses in the drought states. My current conservative advice to agents in all states is to budget for next year as if “zero” profit share was going to be earned for the 2012 crop year and “zero” is going to be paid in October of 2013. We know the corn yield losses are significant across the corn belt states and we also know that the December 2012 corn price is today sitting at $8 per bushel or so. This means that revenue policies, which account for the great majority of the insurance liability, will perhaps pay $8 for every lost bushel for 2012. This will negatively impact all corn loss ratios in all states, even those outside the center of the drought such as Minnesota or North Dakota. This makes it more unlikely that “good state” UW gains will make up for “bad state” UW losses.

Q. Does this mean that our California or Florida agents could have an excellent 2012 UW results and those agents could receive “zero” profit share due to 2012 Midwest drought losses ?

A. Yes, MC opinion is that unless an AIP has limited exposure to the corn belt, even excellent California and Florida results are unlikely to erase the drought losses for 2012.

Q. Will the Risk Management Agency (RMA) ease the compliance review requirements for high dollar claims in the 2012 drought states ?

A. RMA Compliance leadership in Washington DC is aware of the situation and reviewing their options on this issue. During the 2011 drought in Texas, RMA eventually relaxed the review requirements in order to allow for timely indemnity payments. It is too early to forecast the ultimate decision on this matter from Washington as they like to see some actual harvest activity in order to make an informed decision.

ProAg has invested in a robust 45 person Compliance department in order to anticipate a disaster year such as 2011 in Texas or 2012 in the Midwest. We are prepared to take on the work and suggesting that our Compliance department is a competitive advantage for ProAg and our agents. My advice to agents is that they hope for the best from RMA on compliance requirements, but expect the worst. This means that a three year APH compliance review is possible on every account with a $200,000 or greater indemnity. With $8 corn possible as a harvest price, we could see the $200,000 threshold reached with only a 25,000 bushel loss.

Q. MC, what do you expect for the SRA ceiling adjustment factor for 2012 commission payments ? Where does 2011 stand at today ?

A. Right now the 2011 is at .577 and is not expected to move much, if at all. Would now guess that 2012 will be a bit higher, in the .65 or .66 range.

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